Posted by: Josh Lehner | January 16, 2019

Working from Home

As an economist, I’m fascinated and intrigued by start-ups and entrepreneurship. In part because they’re so vital to productivity and economic growth. In part because they’re at or near historic lows. And in part because we do not fully understand the motivations and drivers of these trends. I also tend to lump the self-employed and those working from home into this same general discussion. In my mind, from a big picture perspective, they all kinda, sorta do the same thing. They’re on their own. They’ve identified an opportunity to better serve customers and clients, or find a better work-life balance for themselves, and the like.

However this is not entirely true. There is overlap among these groups, but it is not perfect. For instance, here in Oregon only about one-third of the self-employed work from home, while about half of those working from home are self-employed. There is a wider and more diverse swath of such workers than I thought when it comes to workplace arrangements. The rest of this post will specifically focus on those working from home.

It turns out that significantly more Oregonians work from home than in the typical state. In fact, Oregon ranks #2 behind Colorado when looking across the country. Vermont, Utah, and Montana round out the Top 5, with our northern neighbor Washington ranking sixth. Furthermore, such work arrangements are rising somewhat over time, with much of the increase occurring in the past couple of years.

If we dig down and look across the nation’s metro areas, we find that Bend is the Work from Home Capitol of America. Bend ranks first among the 288 MSAs from which I pulled published Census data. Not far behind, Medford ranks #4 in the country. All of Oregon’s metro areas rank in the top quarter nationwide. (Both the published Census tables and the microdata missed some smaller metros, including Albany and Grants Pass.) The rest of the Top 10 include: Boulder, Lawton, Asheville, Fort Collins, Raleigh, Santa Cruz, Denver, and Austin.

The questions then become, who are these workers, what do they do, and why do they work from home? We have some partial answers here that I find pretty interesting.

First, those who work from home are about 6 years older than the workforce overall (median age is late 40s). Their earnings are also bimodal in that they have a larger share earning more than $75,000 per year, but also more with low or negative incomes (I assume due to business losses). Such workers are seen across all major occupational groups. Again, they represent a wide and diverse swath of the economy.

Why these folks work from home is a bit more complicated. Using an updated Housing Trilemma dataset, I was able to look at the nation’s 100 largest metro areas and see which variables influenced the patterns of working from home. What I found in a basic model is that job growth, start-ups, and quality of life all are positively correlated with working from home and statistically significant. I also found that home prices were negatively correlated and statistically significant; that is, the higher home prices are, the lower the share of working from home. What I also found was that the cost of living in general, commute times, and software jobs were not statistically significant. They were all correlated with working from home and had the expected sign, but offered no explanatory power in the model.

My takeaway is that economic vitality and quality of life drive the working from home patterns see among large metros, with housing costs offering an assist.

Lastly, I want to highlight two key aspects seen in the data. One is that among high work from home regions of the country, these higher shares are seen across all occupational groups. And just like Portland leads the typical metro area — see chart below — Portland similarly trails across the board when stacked up against Austin and Denver. Note that Art/Design/Entertainment is driven by higher work from home concentrations among designers, writers, photographers, and artists.

The second major item I found was that when looking at Bend, Eugene, and Medford specifically, these individuals who work from home are diversifying their regional economies. I feel like I’m burying the lede here because this is, in my mind, the most important finding from an economic perspective. That is, the occupations that have high local concentrations in those working from home, are also underrepresented occupations when looking at the regional economy.

In Bend we can see this among Architecture and Engineering, Business, Finance, Legal, and Arts, Design, and Entertainment occupations. These are individuals who most likely want to live in a place like Bend and either brought their job with them or set out on their own to make it work, which we have discussed before with Bend. These types of jobs are also more portable than janitors, teachers, chefs, and the like. They also tend to require a college degree. See here for a similar Eugene chart and here for a Medford version.

Bottom Line: Working from home is on the rise, but remains a small component of a regional economy. Importantly, these folks working from home are diversifying their regional economies, even more so than the payroll survey (employment report) may indicate. Remember about half of all Oregonians who work from home are self-employed and thus not generally counted in the payroll survey. One potential risk is that working from home (remote work) may be more susceptible during a downturn when companies tend to cut the spokes and consolidate at the hub. This is our office’s long-standing concern for the outlook of Oregon’s software sector. However this is just a risk and not a foregone conclusion. Some businesses do not even have physical space any more, for instance. These trends will be interesting to watch in general and over the next business cycle. Now if we could just get more start-ups and better productivity growth…

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Posted by: Josh Lehner | January 10, 2019

Retirements are Coming

Demographics are a powerful force. Next year the oldest Baby Boomers will turn 75 years old. In fact, over the next decade the fastest growing age cohorts in Oregon will all be 70 years old or older. Now, even though Oregon sees a little bit of retiree migration, this growth is almost entirely about the aging population.

The aging of the Silent Generation and the Baby Boomers is also having a tremendous impact on the regional and national economies. See Conor Sen’s recent article for more. It is weighing on growth rates of pretty much everything as they are exiting the workforce and shifting their incomes from wages to retirement accounts and Social Security. Over the years our office has covered much of this ground, however it’s been a few years since we’ve specifically discussed retirements and the outlook.

A handful of years ago we expected 2016-2020 to be the peak of the retirement flows, that is the absolute number of retirements each year would be at their largest. Well, this hasn’t come to pass. In fact, over the past 3 years, actual retirements in Oregon have been only about half of what would have been expected based on demographics alone. Why? Older Oregonians are working to a larger degree. This goes for both relative to the past decade, but also when put in comparison to historical figures.

60 year old Oregonians are working at their highest rate today than at any point in recorded history (data back to 1900, not shown here). Additionally, Oregonians in their mid-60s through early-70s are working at higher rates than anything we’ve seen since the Great Society and War on Poverty began. There was a big decline in employment among older cohorts after the introduction of cost-of-living adjustments for Social Security in the 1950s, Medicare in the 1960s, and increases in old-age survivor benefits, SSI and the like. But these trends have reversed some in the past 20 years.

A key question is whether or not this increase in employment among older Americans and Oregonians is a good development. As we’ve previously discussed (HERE, HERE) there are a number of factors at play. (This also borrows from ECONorthwest’s Dr. Kevin Cahill’s work as covered a bit more in the second link)

Some, like the increased social security retirement age, lower savings and private pensions moving to defined contribution, mean older Americans are more exposed to macroeconomic fluctuations than previous generations and as a result need to work later in life. Others, like higher levels of educational attainment, improved health and less physically demanding jobs, allow individuals to work later in life if they choose to. While such changes impact individuals and their want or need to work, employers also face challenges and opportunities with older workers too.

Note that the increase in employment among 65 year olds may be in large part due to the increase in Social Security’s full retirement age from 65 to 67. This change was made in 1983, and age 67 fully impacts those born in 1959 or later. That said, we have seen similar, proportionate increases at age 67, and at 69 so it is unlikely Social Security is the only factor here.

Now, while older Oregonians may be working later in late for good and/or bad reasons, it has certainty been beneficial for local businesses. Companies are able to retain these workers with a lifetime of experience and institutional knowledge for their industries and firms. Such workers cannot instantaneously be replaced. It creates challenges for businesses to adjust and adapt when such workers exit the workforce. So keeping them in the labor force awhile longer is beneficial overall, particularly in a tight labor market like we have now.

All of that said, we know Father Time is undefeated. Given the underlying demographics, retirements are expected to remain at high levels throughout the coming decade. If we only look at the age distribution of the population, retirements are expected to be largest during the next few years. However, given we have seen employment rates and labor force participation rates (LFPR) rise in recent decades, some continuation of these trends is likely warranted given the discussion above. Even under this scenario where firms are able to retain their workers for a few more years, retirements will more or less hold steady at these historically high levels for the coming decade.

Bottom Line: Retirements will remain at high levels for the coming decade. The demographic crunch is here to stay for the foreseeable future. This puts pressure on the labor market in terms of businesses looking to hire and expand. It also opens up opportunities for younger workers to step into leadership positions. The generational churn in the labor market will mask job opportunities as net growth rates will be lower than in the past. For every retiring worker, a firm has to hire 2 workers to see positive job growth. The first worker simply replaces the retiree, representing no net growth. In the coming years, our office’s baseline employment outlook calls for <1% annual gains, with jobs increasing by 10-20,000 per year. Given retirements, the actual number of job openings for Millennials, Post-Millennials, Gen Z, or whatever we end up calling today’s youth, will be at 2-3 times as large. There will be enough jobs.

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Posted by: Josh Lehner | January 8, 2019

Migration Diversifies Oregon, Barely

A couple years ago we examined Oregon’s diversity and the fact that Oregon’s foreign-born population is fairly similar to, albeit smaller than the U.S. as a whole. Now, Oregon does have a somewhat larger Mexican-born population, but many such residents moved to the U.S. during 1980s, 1990s and through the housing bubble. Few have migrated in the past decade or so for a couple of main reasons. First, due to the housing collapse and Great Recession, there were scarce job opportunities here and Mexico’s economy has done well. Second, the falling birth rate in Mexico over the past couple of generations means there are relatively fewer potential migrants than in the past. Now, a lot of pixels have been written in recent years about the big shift the U.S. has seen among international migrants. No longer do most come from Mexico or Central America. Now most come from Asia. Here in Oregon we see similar trends.

Overall, those moving to Oregon are somewhat more diverse from a race and ethnicity perspective then the current population. However these shifts are on the margin when compared with national figures. The vast majority of new Oregon residents are non-Hispanic whites that largely moved here from other states. In fact, new residents are surprisingly, at least to me, less likely to be Hispanic or Latino then current residents in the state. Breaking this down a bit further, Hispanic or Latino foreign migrants to Oregon account for just under 3% of all Oregon migrants in the most recent Census data. The other 9 percentage points of Hispanic or Latino migrants arrived from other U.S. states. These figures are lower then nationwide estimates.

Where new residents differ the most is the higher share of Asian migrants — twice as large as the current population in percentage terms. The breakdown here is about 34% Chinese, 11% Japanese, and 55% all other Asian countries or pacific islands (this is self-identified race and combines both domestic and foreign migrants to Oregon). This differs quite a bit from the current Asian population in Oregon which is 21%, 6%, 72%, respectively. One key aspect to Asian migration is the impact on our colleges and universities. This increase has been beneficial for our higher education system and regional economies, however as such enrollments dropped the last couple years, it has been somewhat of a drag on growth.

Now, the big question is what does this mean and what are the implications for the economy? Well, it is hard to answer definitively whether Oregon’s general lack of diversity is holding back the regional economy. Growth this cycle in Oregon has outpaced the vast majority of other states, like always. However in a world where international trade in services is increasingly important, having a local workforce who can speak the language and know the customs of other cultures is important, in everything from business relationships to contract language and the like. Oregon has proven the ability over the decades to attract and retain talent as needed. However it is possible the lack of an existing workforce along these lines may preclude firms from opening and expanding here. This is potentially the opportunity cost for the regional economy. Similarly from an individual’s perspective, she may be less likely to live in a place where few people look like her, worship like her, and the like.

Bottom Line: Oregon is becoming more diverse over time. This is in part due to births, but also in part due to migration trends. However these shifts are small in any given year. Demographics change only slowly over time, but are powerful forces.

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Posted by: Josh Lehner | December 27, 2018

Oregon’s 2018 in Review

2018 was another banner year for the economy. Jobs in Oregon are on pace to increase 2.1% which is good growth for the ninth year of an economic expansion. More importantly these gains are still strong enough to accommodate the influx of new residents and the Oregonians entering or coming back into the labor market. The unemployment rate is on pace for another historic low at 4.0% even as the population grows and participation rates by age cohorts are higher than a few years ago.

While topline indicators look great, improvements continue to be seen underneath the surface as well. In the past couple of years, economic growth is translating into better economic outcomes, including rising incomes, across Oregon’s industries, regions, and racial and ethnic groups. As such, two of the biggest under the radar outcomes this past year are rural areas regaining their employment levels from a decade ago, and the poverty rate for Oregon’s communities of color reaching a likely historic low.

First, let’s look at employment in rural Oregon. Both urban and rural areas of the state, in aggregate, lost the same percentage of their jobs during the Great Recession. However, urban areas returned to growth first — Portland in particular, being the biggest and most diverse economy in the state — and have been at historic highs for years. Rural areas, on the other hand, spent nearly 4 years at the bottom of the Great Recession with meaningful job growth only returning in 2014 or so. Fast forward to today, employment in Oregon’s rural counties is now back to where it was prior to the Great Recession. This is not a destination, but is an important milestone to note.

Of course there is a lot of variation across rural Oregon. Every county and regional economy is different. Places like the North Cost, Gorge, and Northeastern Oregon have all done and continue to do well. Our southern regions have seen less robust gains. That said, the median rural county is 80% recovered in terms of jobs today relative to pre-Great Recession peaks. Only a few have seen hardly any growth this expansion, namely Crook, Gilliam, Grant, and Harney. Looking forward, Oregon’s rural economies will continue to grow and improve. The vast majority of the demographic drag is in the rearview mirror.

The second major under the radar milestone reached this past year is a likely historically low poverty rate for Oregon’s communities of color. I say likely because Census redesigned the race question in 2000. Before then a person could only choose one race, where as beginning with Census 2000, a person could choose multiple races. As such historical figures are not perfectly comparable to current figures. I also only went back to Census 1980 to crunch the numbers. That said, we know from earlier work that the economic recovery is reaching all groups in Oregon even as big racial gaps remain. And even though this refers to 2017 data, it was released in 2018.

Now, just as there is not one uniform rural Oregon, there is considerable variation among the various racial and ethnic groups in the state as well. Relative to recent history, American Indian and Alaska Natives in Oregon currently have a record low poverty rate, as do Hispanics. Black Oregonians are near historic lows, but they current experience poverty rates about one percentage point higher then seen in 1999 or just as the economy crashed a decade ago. Poverty rates seen among Asian or Pacific Islander Oregonians are somewhat higher than a decade ago.

As discussed before, big disparities remain in the economy. This includes industry trends, geographic differences, outcomes by race or ethnicity, or outcomes by educational attainment, and the like. However, as the expansion continues, these disparities are expected to narrow. A tight labor market does wonders, even if it does not cure all ills. 2018 was another example of this and expectations are 2019 will be another good year for the economy.

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Posted by: Josh Lehner | December 19, 2018

A Few Thoughts on Wealth

Economists have tons of data and research on current incomes. However we have considerably less on wealth. In fact we have next to nothing at the regional or local level. Given the increased concentration of wealth in recent decades, and the aging of the large Baby Boomer generation, wealth is becoming a larger component of our community, economy, and potentially our tax revenues.

Now, the first thing I think of when it comes to wealth is housing, or home equity. This is particularly true in recent years given the housing market. Owner occupied home equity in Oregon, as a share of personal income, or as a share of GDP, is at an all-time high. Across the country, home equity in a primary residence is about half of the typical family’s net worth. But among families in the bottom 75% of the distribution, housing wealth is essentially all they have, if that.

However, while home equity is the major source of wealth for the vast majority of the population, that is not the case for the highest net worth families. In looking at the Federal Reserve’s triennial Survey of Consumer Finance over the years, the value of a family’s primary residence is about 15% of the total assets for those in the top 10% of net worth. Financial investments and equity in privately owned businesses account for the lion’s share of assets for such families.

These trends and factors come into play regarding Oregon’s estate tax. Such collections have greatly outstripped our office’s forecasts in recent years. Our revenue outlook is tied to asset values and demographics, but also dampened some by the expectation of estate tax planning based on feedback from our advisors. The total number of taxpayer subject to the estate tax hasn’t increased much in the past 15 years, but the value of these estates certainly has. One further, unpredictable factor here are deaths and when our friends and family pass away. We know not everyone passes perfectly in line with actuarial tables, helping to drive some of the volatility seen in tax collections.

While there is considerable fluctuations in estate taxes, capital gains are even more volatile. There are myriad factors at play including when a taxpayer chooses to realize gains based on their value, or the taxpayers need for income to pay the bills. That said, the hardest component here when it comes to capital gains is the fact we do not have good information on what the cost basis for these gains actually is. Is the gain based on an asset (a stock, or business, or house) that was purchased recently, or one that was bought decades ago and which there are considerable unrealized gains?

The answer to this question is a known unknown, it varies tremendously by taxpayer, and is something our office regularly discusses with our revenue advisors. Given we are now in the midst of the third major run-up in asset values and capital gain realizations in the past 20 years, our office is concerned about the outlook going forward. Not in the sense that asset values with crash — that is always a risk — but in a bigger sense about the stockpile of potential capital gains outstanding. With the dotcom crash and housing bubble, the economy has recently underwent two major purges of capital gains. It is possible that taxpayers are tapped out and we will not see the same type of revenue growth moving forward, or rather, tax collections will be even more closely tied to current asset prices with less alpha and more beta than the underlying economy.

Well, it turns out this may be less of a concern then we first thought. The average amount of unrealized capital gains for privately owned business and for financial assets (excluding retirement accounts) are back to all-time highs as of 2016. Potential real estate gains were not back to their bubble peaks just yet, but as seen at the top of the post, we are here in Oregon and the U.S. is closer with an additional two years of rising prices.

Now, with a bit of further numerical gymnastics, we can estimate the total stockpile of U.S. unrealized capital gains and then share that down to Oregon based on the growth in our high income households over the years. This is not a perfect look, but is as good as we can do given the lack of local data. And it turns out that if you match up these estimates of the unrealized capital gains with actual realized capital gains as reported on tax returns, they line up pretty well.

It is interesting to note that at the peak of the past two cycle, the trends in realized capital gains outstrip the trends in the underlying stockpile of unrealized gains. Does this represent profit taking at the top of the cycle? Or that taxpayers are no longer delaying their gains/gratitude as much? Or that there is considerably larger capital gains from current economic activity driving revenues, and not being as reliant upon long-held assets? Whatever the case, at least in 2016, this top of the cycle behavior was not yet happening. That said, given the increase in realized capital gains in 2017, expectations for strong 2018 tax filings, and now a stock market that is largely moving sideways or down in recent months, this gap may be happening today or in the near future. We will have to wait for more tax collection data and the 2019 SCF to know for sure.

Finally, in large part due to the volatility of estate taxes and capital gains, Oregon policymakers during the 2017 legislative session, passed Senate Bill 1566 which will direct some of these revenues — when they are above their 10 year growth trend — to help with the PERS unfunded liability.

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Posted by: Josh Lehner | December 12, 2018

Reconsidering Single Family Zoning

As policymakers, builders, and the market work to solve the housing supply issues, a key question everybody asks is what type of housing do we need? Aren’t millennials always going to be renters? [No] Should we grow up, or out? Our office’s simple answer is yes. To accommodate recent and expected growth we will need to see housing supply pick up across the spectrum. This includes both an increase in the effective (buildable) land supply and redevelopment opportunities on lands within our existing communities. This is especially true for areas with good access to employment centers, stores, restaurants, transit and the like.

While most housing discussions — at least ones our office are a part of — tend to focus on land supply and new construction on the urban fringes, the redevelopment aspect is also an integral part of the housing supply solution. Despite this post’s title, I don’t want to get bogged down in the zoning weeds here. That said, there are a number of important aspects to discuss and points to consider. Lately I have incorporated more of this work into presentations, including for recent Bend and Portland forecast events.

The crux of the matter is land is the scarce commodity here. Outside of lava flows and seawalls, we’re not making more of it. As a region grows, so too does housing demand which places upward pressure on housing costs. This is great for homeowners as wealth builds, but bad for renters and the economy more broadly. Provided we, as a community, actually want to address affordability and accommodate future growth, increased construction is a must.

The problem is in many places one cannot simply build more housing due to zoning restrictions (minimum lot size requirements, setbacks, parking etc). However, if a community were to allow for more units to be built on a given parcel of land, then better affordability can be achieved, and future growth more efficiently accommodated. This is for at least two reasons. First, one would be dividing high land costs over a larger number of units which both lowers cost per unit and increases supply relative to existing zoning. Second, each unit will be smaller than under current zoning, which also lowers the cost per unit.

Currently the City of Portland is considering making changes to much of its single family zoned neighborhoods. Minneapolis recently passed similar zoning changes and Seattle has been wrestling with the possibility in recent years. Now, the proposed changes are not for high rise construction throughout the city, but it would allow for townhomes, duplexes, and triplexes to be built, the so-called missing middle housing. A recent analysis by Johnson Economics for the City of Portland confirms such changes would greatly increase housing supply and improve affordability relative to the status quo. Full disclosure: Jerry Johnson is a member of the Governor’s Council of Economic Advisors, our office’s main advisory group.

Essentially what the analysis finds is the net increase in new housing units in the City of Portland would triple relative to current policies and rents for the new units would be half the price. How is this possible? As the report says: “the net impact is expected to be a greater proportion of redevelopment being multiple-unit properties, providing greater net unit yield and lower average price points as a result.” Now, these new units are not cheap, as new construction is expensive, but allowing for townhomes and quads instead of just large, detached single family homes does reduce the price per unit. Additionally, this outcome does not result in a big increase in demolitions of existing homes either.

Specifically, the analysis finds the net increase in housing units on the potentially rezoned parcels would be 1,800 per year over the next 20 years. This is both massive for a single policy change and modest from a growing, regional perspective. In looking at population growth and household formation forecasts for the entire Portland region, this proposed change equals 13-15% of the annual increase in housing demand. By simply allowing for — not requiring — townhomes and triplexes to be built on existing lands in the City of Portland, the policy can accommodate 1 out of every 7 new Portland area households in the coming decade. That is a big finding. Now, on a regional scale it is a bit more modest as we still need to figure out where the other 6 new households will live.

Finally, while I believe the most important aspects from an economic perspective are affordability and supply, there are myriad concerns and societal issues that come along with growth and changes. Growing pains are real, even as they are much preferable to the pangs of decay seen through the Rust Belt and elsewhere. That said, as we have discussed before, there are also some real economic and societal benefits to missing middle housing.

All of these benefits accrue to individuals, their households, their communities and help address public policy issues at the same time. Townhomes are more affordable than detached single family homes*. Missing middle housing allows for somewhat denser neighborhoods which supports local businesses, a more walkable neighborhood while also not towering over neighboring buildings as high rises do. Providing housing options within existing neighborhoods also better allows one to age in place, and older residents do not have to leave lifelong friends and relationships to downsize as their housing needs change. Missing middle housing, through better affordability and providing options results in more integrated neighborhoods which is one of the five key characteristics of high economic mobility communities. Finally, missing middle housing reduces the environmental impact and, crucially, makes more efficient use of existing infrastructure.

From our office’s view, addressing housing supply and affordability is key to Oregon’s long-run economic growth. If households cannot afford to live in or move to Oregon, it puts our biggest comparative advantage at risk: the ability to attract and retain young, skilled workers.

* In presentations I like to give a personal anecdote to illustrate this dynamic. A couple years ago a builder tore down an old ranch on a double lot just around the corner from my house (4 tax lots away). It was replaced with two single family homes that sold for about $700,000 and $800,000. Only 10-15% of Portland area households could afford a home in that price range. At the same time this was happening, a builder tore down an old bungalow directly across the street from our house. It was replaced with two townhomes (a duplex) that each sold for about $450,000. While this is still expensive, and above market averages at the time, 30-35% of Portland area households could afford a home at that price point. In this sense, missing middle housing is 2-3 times as affordable as detached single family homes.

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Posted by: Josh Lehner | December 7, 2018

Fun Friday: Households Feeling Good

The strong economy is reaching all corners with employment rates and household incomes rising. One result is households are feeling pretty good right now. Balance sheets have been repaired. Debt, while rising, is in line with income gains, meaning there is no massive buildup like last decade. More importantly, given low interest rates in recent years, the payments to service the debt are at or near historic lows. All told, consumer sentiment is as high as it was at the peak of the 1980s and mid-2000s expansions, although a bit lower than in the late 1990s.

One result of this is discretionary spending as picked up in recent years. Overall consumer spending is roughly in line with income growth, meaning the savings rate is holding fairly steady. But we have seen a shift in the types of things consumers are buying over the last couple of years.

In particular there has been strong gains in what I call entertainment spending. This includes admissions to events and activities, gambling, going out to eat and on vacation. These types of activities are discretionary and are growing more than one percentage point faster than income or overall spending in recent years. Obviously households don’t need entertainment to survive, although it does bring us joy, and more often than not sports-related heartbreak. It does appear that the strong economy, which drives household finances, is now translating into increased discretionary spending. This likely bodes well for holiday shopping in the immediate-term, but also for these types of businesses through the rest of this expansion.

Two final items. First, one could argue that a good chunk of this pick up in entertainment spending is the result of lower energy/gasoline spending in recent years, with an even more pronounced decline in Oregon. Given oil prices are somewhat higher today, expected growth in discretionary spending won’t be quite as strong as in 2015 or 2016.

Second, spending patterns vary within this broad entertainment category. One particular, discretionary activity our office tracks is gaming given we forecast revenues for the Oregon Lottery. Stay tuned for an update on the gaming outlook in the near future.

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Posted by: Josh Lehner | November 29, 2018

Economic Mobility: Place and Community Matters

Next Monday, Raj Chetty, via satellite, will be presenting at the Oregon Leadership Summit. If the name may not be familiar, his research certainly is. Dr. Chetty, along with Nathanial Hendren and a rotating cast of coauthors have been producing groundbreaking research in recent years that focuses on economic mobility and outcomes. This is economic rock star level work. It is groundbreaking in at least two ways. First, the level of detail, breadth of topics, and findings help policymakers trying to improve outcomes. Second, the data and methodological work provide a unique and informative data set from which to analyze these outcomes. Dr. Chetty and team have matched millions of tax records over time to look at incomes, employment, incarceration, marriage and the like. They primarily compare adult outcomes for children born in the 1980s with their parents’ outcomes, and based on the location where kids were raised. They don’t have all the answers yet. But the conversation surrounding economic outcomes, and what helps or hinders progress is much further along today thanks to Drs. Chetty, Hendren, and team.

What follows is a long, yet incomplete summary of this great research based on my reading of it over the years.

Read More…

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Posted by: Josh Lehner | November 20, 2018

Thanksgiving and Holiday Shopping

As we gather round the table and relatives share embarrassing stories of our youth, we are also scouring ads, websites and our feeds for good shopping deals this holiday season. The near-term outlook remains bright. According to the latest CPI figures, whole, frozen turkey prices are down about 4 percent year-over-year. More importantly jobs and incomes are up and gas prices are falling, setting the stage for solid holiday spending this year.

Over the past couple of years there has been a big debate raging on the outlook for traditional retail versus the rise of e-commerce, or online sales. At this time of year you can think of this as Black Friday versus Cyber Monday. Although at this point, those distinctions are pretty much meaningless. Anyway, the conventional wisdom has settled on the retail apocalypse narrative. Traditional brick and mortar retailers are the walking dead, whether they know it or not.

Now, we have seen hundreds of big retail stores close in recent years, in addition to a few high profile bankruptcies. However, this isn’t about e-commerce, given such sales are just now approaching 10 percent nationwide. The rise of e-commerce plays a role, but a minor one. The big underlying issue behind the bankruptcies seems to be corporate finance, specifically debt problems due to past buyouts and restructuring. Some store closures are tied to sales in general given local economic conditions and population declines. That said, whatever the underlying cause, store closures impact the workers who lost their jobs, and communities that lose their downtown or shopping center anchors.

What gets lost in the e-commerce versus brick and mortar discussion is the fact that large portions of retail continue to do well. This includes auto dealers, grocery and home improvement stores in particular. That said, the segments most exposed to online competition — things like books, sporting goods, clothing and the like — have seen less growth, even some declines, but are not (yet) plunging. The apocalypse narrative is overblown today. However, employment at e-commerce firms, or sectors that facilitate e-commerce sales are growing rapidly in recent years, even if they remain considerably smaller than more traditional retailers.

In terms of the outlook there are a few important items to note.

First, current and future retail vacancies provide a big opportunity for local communities to redeveop and rethink some of their biggest tracts of land. For smaller cities experiencing slower economic growth and even population losses, redevelopment will be challening, and replacing one retailer with another may be impossible. However for larger areas, redevelopment of land along major roads and transportation networks provides myriad opportunities.

Second, our office’s forecast calls for ongoing growth in retail employment in Oregon. The old adage is retail follows the rooftops. So as Oregon’s population increases, so too will the demand for retail goods. That said, over the coming decade retail employment will increase one-third to one-half as fast as population growth. The sector will see gains, but slow ones. Retail employment relative to the size of the population is set to reach historic lows.

Third, at the recent Bend Chamber or Commerce event, Tom Potiowsky, former state economist and current NERC director, put retail on the list of sectors most exposed in the next recession. I think he is right, at least those traditional brick and mortar segments most exposed to online competition. If we’re seeing flattish growth in today’s economy, a recessionary drop will push more establishments over the edge.

Fourth, Conor Sen makes a lot of sense when discussing the e-commerce vs traditional retail outlook. Clearly e-commerce has won a larger and growing share of retail in the past decade, hurting traditional retailers. However, looking forward, Conor notes the drivers of these changes, and their costs may flip. With more vacant retail space in addition to more being built, rents are softening, helping retailer costs. For e-commerce they are seeing ad rates rise, customer acquisition costs increase, and running into transportation supply constraints (truck drivers, costs, congestion, etc). These shifts do not mean e-commerce will recede, but do make it more likely that the coming decade will not just be a continuation of the previous decade’s patterns.

Happy Thanksgiving everybody!

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Posted by: Josh Lehner | November 14, 2018

Oregon Economic and Revenue Forecast, December 2018

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

Current economic growth remains strong. Nearly all leading indicators are flashing green, signaling solid gains in the near-term. However, the economy is set to slow moving forward for a number of reasons. First, growth must slow to a more sustainable rate. As the U.S. and Oregon reach full employment, supply side constraints will work to slow growth. These include a tight labor market, infrastructure, higher energy costs, capacity utilization and the like. Such hurdles to growth do not prevent firms from expanding and propelling the economy, but they do require time, plans, and money to overcome. The low-hanging fruit of growth is gone in a mature expansion.

Furthermore, uncertainty surrounding the economic outlook increases over the course of the upcoming 2019-21 biennium. The primary drivers of uncertainty relate to federal policies and the magnitude of their impact on the economy. As the tax cuts and spending increases play out at the federal level, fiscal policy will turn from a driver to a drag on growth in 2020. Similarly, monetary policy will have transitioned from accommodative to neutral, and likely even restrictive in a couple of years. The full impact of the Federal Reserve’s rate hikes that began in late 2015 will be working to slow the economy.

Between today and the next recession, whenever it may come, the Oregon economy will continue to hit the sweet spot. The strong labor market is driving employment rates higher and poverty rates lower for all ages and racial and ethnic groups across the state. One result is household incomes are reaching historic highs on an inflation-adjusted basis. The feel good part of the economy is clearly here.

Oregon’s economic outlook faces significant uncertainty a couple of years down the road, but there is relatively little risk to the outlook over the remainder of the current biennium.  The same cannot be said for Oregon’s state revenue forecast, which faces a tremendous amount of uncertainty in the near term.

Thus far during the 2017-19 biennium, growth in Oregon’s major revenue sources has been consistently stronger than gains in the underlying economy would suggest. Much of the strong revenue growth can be traced to temporary factors, including the response of Oregonians to federal tax law changes. State tax liability has been boosted somewhat due to the federal reforms, but recent payments have been larger than what could reasonably be expected due to the direct impact of the law changes.  It is likely that collections will cool down going forward as households and businesses reconcile their annual tax bills.

One facet of the federal tax reform that has become clearer in recent weeks is the impact of repatriated foreign earnings.  While a significant amount of repatriation is occurring, initial estimates of the flow are proving to be too large, and have been revised downward.  Given the large degree of uncertainty surrounding this one-time revenue boost, policymakers in Oregon channeled corporate taxes associated with repatriation outside of the General Fund, with most going to reduce unfunded pension liabilities for school districts.  These funds will be pulled out of the revenue stream during the next biennium.  The newly lowered estimates imply less will be pulled out next biennium.  Also, since most repatriated profits are returned to shareholders in the form of stock buybacks and dividends, personal income tax collections have been revised downward as well.

Heading into the next biennium, uncertainty about the performance of the regional economy will become paramount.  Growth will certainly slow to a sustainable rate in the coming years, but the path taken is unknown.  Capacity constraints, an aging workforce, monetary policy drags and fading fiscal stimulus will all act to put a lid on growth a couple of years down the road.  However, the exact timing and steepness of this deceleration is difficult to predict, leading to a wide range of possible revenue outcomes for the 2019-21 budget period.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

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